Comcast Corporation 10-Q Summary
Business context and reporting period
Comcast filed this unaudited Form 10-Q for the three and nine months ended September 30, 2010. Comcast is primarily a provider of video, high-speed Internet and phone services through its Cable segment, which generated approximately 94% of consolidated revenue. At September 30, 2010, the Cable business served approximately 22.9 million video, 16.7 million high-speed Internet and 8.4 million phone customers across 39 states and the District of Columbia. The Programming segment includes national networks such as E!, Golf Channel, VERSUS, G4 and Style.
Financial results and key metrics
| Metric | Three months ended September 30, 2010 | Three months ended September 30, 2009 | Nine months ended September 30, 2010 | Nine months ended September 30, 2009 |
|---|---|---|---|---|
| Revenue | $9,489 million | $8,845 million | $28,216 million | $26,689 million |
| Operating income | $1,954 million | $1,711 million | $5,967 million | $5,397 million |
| Operating margin | 20.6% | 19.3% | 21.2% | 20.2% |
| Net income attributable to Comcast | $867 million | $944 million | $2,617 million | $2,683 million |
| Diluted EPS | $0.31 | $0.33 | $0.93 | $0.93 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $7,732 million | $7,725 million |
Operating income before depreciation and amortization, Comcast's primary segment performance measure, was $3,578 million in the third quarter and $10,880 million for the first nine months, representing margins of approximately 37.7% and 38.6%, respectively. This non-GAAP measure should not be treated as a substitute for GAAP operating income, net income or operating cash flow.
- Third-quarter revenue increased 7.3%, while operating income rose 14.2%. Nine-month revenue increased 5.7% and operating income rose 10.6%.
- Third-quarter net income attributable to Comcast declined 8.2%; nine-month net income declined 2.5%. Higher income tax expense was a significant factor.
- Nine-month capital expenditures were $3,429 million, compared with $3,508 million in 2009. Cash paid for intangible assets was $372 million, and acquisitions used $183 million.
- Cash and cash equivalents were $4,542 million at September 30, 2010, compared with $671 million at December 31, 2009. Available borrowing capacity under credit facilities was approximately $6.4 billion.
- Total debt was approximately $31,038 million, consisting of $2,300 million of current debt and $28,738 million of long-term debt, compared with approximately $29,096 million at year-end 2009. Reported debt fair value was $34,932 million.
- Nine-month financing activity included $2,420 million of borrowings, $649 million of debt repayments and repurchases, $892 million of share repurchases and $800 million of dividends paid.
- The quarterly dividend was $0.0945 per share, and management described a planned annual dividend of $0.378 per share, subject to Board approval.
Material changes versus the prior comparable period
- Cable revenue increased 6.9% in the third quarter and 5.2% for the first nine months. High-speed Internet and phone revenue grew strongly, while video revenue increased only modestly.
- Programming revenue increased 8.7% in the third quarter and 11.3% for the first nine months; segment operating income before depreciation and amortization increased 26.3% and 23.2%, respectively.
- Customer trends were mixed: Comcast added 766,000 high-speed Internet customers and 731,000 phone customers during the first nine months, but lost 622,000 video customers. Management expected further video-customer declines during the remainder of 2010.
- Average monthly total revenue per video customer increased to approximately $130 in the third quarter from $118 in the prior-year quarter, driven by bundled services, rate adjustments and commercial services.
- Video programming expense increased 5.4% for the first nine months, reflecting higher rates and additional programming options. Marketing expense increased 15.3%, partly due to customer acquisition and the XFINITY brand launch.
- Interest expense declined to $1,612 million from $1,828 million for the first nine months, primarily because 2009 included approximately $180 million of costs associated with a cash tender offer and debt repayment.
- Income tax expense increased to $1,763 million from $1,088 million for the first nine months. The 2009 period benefited from approximately $436 million of tax benefits related primarily to uncertain tax positions, interest and corporate reorganizations. Comcast expected an approximately 40% annual effective tax rate for 2010.
Guidance, outlook, risks and unusual items
- Comcast expected to close its NBC Universal transaction with General Electric by the end of 2010, subject to regulatory approvals. Comcast would own and control 51% of the new company, while GE would own 49%.
- Comcast expected to pay GE approximately $7.1 billion, subject to specified adjustments, and committed to fund up to $5.75 billion in cash or common stock for potential future redemptions of GE's interest.
- NBC Universal-related legal, accounting and valuation costs were $57 million for the first nine months. Comcast also recorded $91 million of its share of financing and other transaction costs in other expense and $6 million in interest expense.
- Comcast stated that it expected to meet current and long-term liquidity needs through operating cash flow, cash and investments, available credit facilities and future financing. It expected capital expenditures, debt obligations, acquisitions and shareholder returns to continue to use substantial cash flow.
- The company reported no impairment charge from its July 1, 2010 annual testing of cable franchise rights.
- Material risks include competition from cable, satellite, telecommunications and emerging technologies; rising programming costs; regulation; weak economic conditions; technology and network disruptions; intellectual-property claims; litigation; acquisition execution; and dependence on key personnel.
- Legal matters include antitrust class actions involving customer exchanges, programming practices and set-top-box rentals, patent litigation and an ERISA matter settled for $5 million plus administrative actions. Comcast stated that the proceedings were not expected to materially affect consolidated financial position, although individual periods could be materially affected.
- Comcast supported debt compliance for an affiliated cable system through a $410 million commitment expiring in March 2011. Management believed the affiliate would satisfy the requirement without Comcast funding the commitment.
Most important facts for investors to verify
- Completion, financing and regulatory status of the NBC Universal transaction, including the $7.1 billion payment and future GE redemption obligations.
- Whether continued video-customer losses offset growth in Internet, phone, advertising and commercial services.
- Programming-cost inflation and its effect on Cable margins and cash flow.
- The sustainability of approximately $7.7 billion in annualized operating cash flow after capital expenditures, intangible-asset spending, dividends, repurchases and transaction funding.
- Debt maturities, refinancing requirements and leverage after the NBC Universal transaction.
- The approximately 40% expected 2010 effective tax rate and the absence of comparable one-time tax benefits recorded in 2009.
- Developments in antitrust, patent and other litigation, including potential exposure that could be material to a particular reporting period.